module_5_21_

TECHNOLOGY
CONTRACTS

CERTIFICATE COURSE

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DEVELOPED BY

MODULE - 5

TECHNOLOGY OUTSOURCING
AGREEMENTS

5.1 MEANING OF INFORMATION TECHNOLOGY 5.2 WHAT ARE TECHNOLOGY OUTSOURCING
OUTSOURCING AGREEMENTS?

The practice of engaging third party resources from A legally enforceable agreement which establishes
the outsourcing relationship between the company
outside of an organization, either locally or outsourcing its IT services (also known as service
receiver) and the external vendor (also known as
internationally, to handle certain information service provider), and outlines their respective rights
and liabilities, is termed as an Information
technology functions of the company such as web Technology outsourcing agreement.

development, software and application development, 5.3 TYPES

web hosting, website maintenance and/or Most popular types of IT outsourcing contracts
include:iii
management, database development and
5.3.1 Complete Outsourcing
management, technical support,
In a complete outsourcing agreement, the whole IT
telecommunications, and infrastructure function of an enterprise, including its existing IT
assets (IT equipment and software) and IT personnel,
management, among various other information are transferred from the company outsourcing its IT
services, to the external vendor. A complete
technology functions, is called Information outsourcing agreement is usually for a long term,

Technology or IT outsourcing.i Some other IT services

which are most commonly outsourced include data

centre management, help desk, independent testing

and validation, systems integration, security,

research and development, and cloud computing. IT

outsourcing is also defined as “subcontracting all or

part of the IT functions of a company to an external

outsourcing vendor”ii.

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whereby the outsourcing vendor carries all the risks computing’ since the outsourcing vendor’s data
and responsibilities of providing IT services to its centre is located away from the customer’s premises.
outsourcing customer. Thus, in this kind of
arrangement, the IT functions of a company in its 5.3.4 Systems Integration Outsourcing
entirety, is treated as a market commodity.
This is a type of IT outsourcing model which involves
5.3.2 Facilities Management interconnectivity among IT systems of several
organizations. In systems integration outsourcing,
Facilities management involves the outsourcing the outsourcing customer hires a single outsourcing
vendor taking over the IT operations of the vendor to handle the installation and operations
outsourcing customer, at the premises of the management of the customer’s ‘multi-vendor
customer. In this kind of arrangement, the heterogeneous’ IT infrastructure, in a manner such
outsourcing vendor either provides necessary human that the resultant IT system is integrated and
resources for management of the client’s IT interlinked with the IT structures of several different
functions, or, transfers the existing IT employees of organizations.
the client onto its payroll, who then continue to
operate and manage the customer’s IT functions 5.4 KEY CLAUSES
under the direction and control of the external
outsourcing vendor. Facilities management gained Key provisions of a well drafted IT outsourcing
popularity in the 1980s following a dire shortage of agreement include:iv
skilled and technically proficient IT professionals.
• Scope of services: this provision must lay
5.3.3 Remote Computing Services down a detailed description of the scope of
the outsourcing services to be provided. It
The most popular model of IT outsourcing, remote must include the details of the IT functions to
computing services involves provision of IT services be performed. The provision must also specify
remotely from the external vendor’s data processing the manner of performance of such
facility to the outsourcing customer, wherein the outsourced services, and outline details
vendor either buys/assumes lease for the customer’s regarding the actions and responsibilities of
existing IT equipment; or sells off/terminates leases the parties in the performance of outsourcing,
for such equipment. It is termed as ‘remote inputs to be used, systems to be used for
completion of the work, location of the

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systems proposed to be used, access to such or circumstances under which the IT
systems, software to be used to complete the outsourcing agreement may be terminated.
work, and the mode of accessibility by the Specific guidelines must be laid down as to
customer. For instance, details as to whether what constitutes ‘circumstances’, for
cloud computing will be used to facilitate instance, non-fulfilment of or deviation from
access by the customer, and if not, the service level standards, insolvency of the
alternative modes of accessibility. outsourcing vendor, change in management
• Dates of agreement: this clause should of either party, or non-performance of the
specify the effective date of commencement contract. Further, the termination clause
and conclusion of the IT outsourcing must also set forth post-termination
agreement. If the date for commencement of responsibilities/obligations of the
provision of outsourced services is not the outsourcing vendor. Some examples of post-
same as the effective date of commencement termination assistance from the vendor
of the agreement, the same must be clearly includes turning over of data processing
stated. This clause must also provide for operations and procedural know-how to the
extension of the agreement, whereby the new outsourcing vendor; assisting the new
agreement may be extended for an additional vendor in reviewing all system software
term on expiration of the original term, upon libraries; helping the new outsourcing vendor
mutual agreement between the customer and to analyse the requisite amount of space for
the vendor. the client’s databases and system software
• Variation in services: this clause details the libraries; turning over of vital
procedure for accepting changes/variations telecommunications network links to the new
in outsourcing service requests, including vendor; notifying the new service provider of
specifics of changes in the services to be any naming conventions used; and answering
provided, corresponding changes in the service related queries on a “need to know”
pricing model, variations in the process, and basis for a pre-defined time period post-
changes to allocation of resources. termination of the agreement.
• Termination of services: the termination • Pricing and fee structure: the pricing
clause must clearly delineate the conditions structure must clearly spell out every aspect

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of the pricing model such as, the initial set-up warranty period, and the corresponding
fee for start of the service including the scope variations in fees.
of such fees, security bonds, ongoing fees and • Obligations of the outsourcing vendor: the
disbursements for work to be performed as agreement should lay down all the duties and
per the agreement, employee on-costs, obligations of the external vendor in this
employee entitlements, miscellaneous provision, such as full disclosure of relevant
expenses, foreign exchange, overseas information and data, adhering to expected
taxation including any GST provisions. service levels, monitoring, delivery of
• Terms of payment: this provision must lay mutually agreed volumes of work,
down strict guidelines regarding the payment maintaining confidentiality, post-termination
terms, requisite deposits, terms and assistance et cetera.
conditions of late payment and late fees, • Obligations of the outsourcing customer:
penalties for non-performance of required this provision should outline the
service levels, terms of contract termination responsibilities of the outsourcing client such
and disengagement, and, provisions as detailing the specifications of services to
regarding contract reward and penalty be provided by the vendor, providing access
considerations. to necessary data and information to the
• Warranties: the outsourcing vendor must vendor, specifying expected level of
warrant providing complete and accurate performance, performance reviews through
information, true to the best of his regular progress meetings and reports,
knowledge, to the client; and a consistent and assisting in migration of IT equipment to the
professional delivery of high quality service in vendor’s data centre et cetera.
a timely manner. The clause must lay down a • Communications: the communications clause
warranty period during which client may lays down clear guidelines regarding
demand rework or added services, and its procedures for ongoing and regular
implications on fees. It must also provide a communications between parties to the
detailed set of terms and conditions for contract; relationship management process
requesting revision of services after the including procedures for performance

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reviews; and, the requirement for appointing • Data security: the IT outsourcing agreement
must provide detailed provisions regarding
executives from both parties who are to data protection and security, such as,
requirement of the data to be free from any
handle, address and resolve all virus, spyware, malware and other forms of
security threats; adoption of requisite data
communications and queries pertaining to security measures such as anti-virus
installations and a rigorous monitoring
the outsourced services. process; implementing adequate data access
controls; and details of data storage locations,
• Data retention: this clause should specify along with mode of access of such locations
especially if data is stored on the Cloud and
details of ownership of documents and existing safeguards and restrictions.

records relating to the outsourcing services; • Non-compete clause: this clause provides
that the outsourcing customer refrain from
procedures for transmission, exchange or engaging any new outsourcing vendor to
outsource its IT services during the term of
access of relevant data; and, terms and this agreement.

conditions of data retention by the • Miscellaneous: the miscellaneous provision
may possibly cover issues like terms and
outsourcing vendor. conditions of using other external entities
such as actuaries, auditors; provide insurance
• Confidentiality: the IT outsourcing and indemnity details; and, lay down clear
procedures regarding changes in ownership
agreement must clearly delineate provisions or business structure.

regarding management of data • Dispute resolution: the dispute resolution
clause must provide escalation procedures
confidentiality and privacy. The for disputes that may arise between the

confidentiality clause should lay down

responsibilities and obligations of either

parties to keep information pertaining to both

parties’ businesses and this agreement,

including their correspondence details

confidential and private. It should lay down

procedures for communicating with third

parties; permitting applicable professional

bodies to access documentation pertaining to

the IT outsourcing services; and, ensure

compliance with applicable privacy laws of

the concerned jurisdiction.

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parties to the contract, along with preferred (Management/Managed Services Provider)
dispute resolution mechanisms, governing helps reduce some of the expenses, enabling
law and jurisdiction clause. the business to gain a competitive advantage
with regards to pricing of goods and services.
5.3 BENEFITS • Access to global talent: outsourcing a
company’s IT services to a qualified MSP
IT outsourcing has several benefits. Some of them are ensures access to a global pool of talented
as follows:v professionals with superior technical
knowledge and know-how of the latest
• Cost reduction: one of the most compelling technologies and trends. Further, the
drivers to outsource IT services is reduction rigorous hiring process of MSPs ensures that
in costs and control of expenses. By their IT professionals are well versed with
outsourcing their IT services, businesses tried and tested methodologies as well as
benefit from reduced labour costs, cheaper latest technological skills and procedures.
infrastructure and tax advantages in the • Saves time: when a company outsources its IT
outsourcing locationvi. Further, businesses services to an external vendor or an MSP
that choose not to outsource IT services but instead of spending resources in building an
operate it internally, incur fixed expenses, as inhouse IT team, it saves a significant amount
opposed to businesses that outsource their IT of time, which would otherwise be expended
services (whether offshore or onshore), that on activities like advertising, interviewing,
are able to convert these fixed costs into selecting and training new inhouse IT
variable costs, thus freeing up capital for use employees.
in other areas of operations that directly • Increased productivity: outsourcing
generate more revenues. Therefore, information technology services to an expert
outsourcing information technology services third party vendor, or a professional MSP,
helps a company control its capital helps a company focus on its core
expenditures. Also, when a business carries competencies and further its core business
out all of its operational activities internally, goals and objectives/missions, without
the expenses are passed on to the customers. spending too much time and resources on
Thus, outsourcing any aspect of its operation,
such as IT services to an MSP

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non-core activities. For instance, in a law firm, 5.4 ISSUES
core competency of the business is legal
services, and non-core services is IT services. Potential issues which may arise out of an IT
Thus, outsourcing of its IT services will outsourcing agreement are as follows:viii
increase the productivity of the business,
ensure an uninterrupted workflow and help 5.4.1 Migration of data processing operations
the business upscale fast.
• Monitoring: monitoring the IT environment If an IT outsourcing agreement opts for remote
of a business becomes much more feasible, computing services, IT equipment from the
easier and convenient when a company customer’s data processing facility requires to be
outsources its IT services to a qualified MSP transferred to the vendor’s data centre. This could
or an expert outside vendor. Since these third give rise to several risks in the transition process such
party agents have adequate resources and as differences in systems configuration, incompatible
tools to foresee any serious IT breaches, and operating system or a malfunctioning hardware
expert professionals to fix any security platform. To mitigate such risks, a ‘migration project
threats, they can help avoid downtime. plan’ must be agreed on by both parties which should
Further, the outsourcing service providers contain detailed procedures for transfer of, or
also advise on necessary IT infrastructure migration of IT equipment from the customer’s site to
upgrades, data backups, software updates, the vendor’s facility, in a phased manner, along with
anti-virus updates and inventory auditing; safeguards to minimize risks related to systems
and can easily detect and rectify backup and migration. For instance, the migration project plan
hardware failures, software crashes, spyware may provide for ‘parallel operations’ wherein prior to
intrusions, database corruptions, and virus the final cutover to the vendor’s data centre, IT
attacks, thereby carefully monitoring and functions would be operated at both the vendor’s and
minimizing risks to maintain a healthy and client’s respective data facilities for a predefined
fully-functioning IT environment of an transition period to ensure that the newly installed
outsourcing service receiver.vii and configured IT system at the vendor’s is producing
identical data processing results as that of the
customer’s system. That is, the IT equipment at both

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the vendor’s and client’s data centres need to be servicing the outsourcing customer, so the client has
parallelly operated for a fixed period to verify that the right to modify such programs in future or in case of
transition process of the IT equipment has been breakdown of the outsourcing relationship. Thus, it is
successful. prudent that the outsourcing client own rights to any
intellectual property developed by the vendor
5.4.2 Damage due to failure to migrate pursuant to the IT outsourcing relationship, and
specify the same in the agreement, to protect its
Problems may arise in the transition or migration of business interests, and ensure a strong bargaining
the IT equipment from the customer’s data facility to position in negotiation of future contracts.
the vendor’s remote computing facility, which may
lead to the customer losing business as well as suffer 5.4.4 Conformity to performance standards
reputational damage on account of failure to meet
contractual commitments to its own clientele. The IT It is essential that the outsourcing vendor adhere to
outsourcing agreement should provide remedies in the ongoing performance standards of the
such cases, in the form of liquidated damages. outsourcing client, so that the client’s ongoing
internal business requirements are fulfilled, as well as
5.4.3 Ownership of intellectual property rights the client is able to serve its own customers according
to a pre-defined standard of work. Thus, it is of
Disputes may arise regarding copyright ownership of utmost importance that the IT outsourcing
data, software programs, manuals and other written agreement pre-define the service level standards, to
documents developed during the course of the prevent disputes at a later stage. However, it is highly
outsourcing agreement by the outsourcing vendor likely that even at the stage of defining performance
for the outsourcing client. It is essential that the client standards, frictions may occur between the parties to
retain ownership of its IT assets, so it can re- the contract. This is because the outsourcing vendor
claim/regain control and management of the same in may be accustomed to a certain definition of
the event of termination of the outsourcing performance measurements or a certain model of
agreement, without crippling the day to day IT service level standards and its corresponding pricing
operations. Further, provisions should be made model, which may substantially differ from the
enabling the client to access the source code of standards prescribed by the client.
programs developed by the vendor in the course of

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5.4.5 Pricing model models need to be applied to different types of
technology outsourcing agreements.
An IT outsourcing relationship must clearly establish
its pricing model in the contract, depending on the 5.4.6 Post-termination obligations
particular type of technology outsourcing agreement.
For instance, prices charged by the vendor in a The IT outsourcing agreement must expressly
facilities management model, is calculable by provide that the vendor is obligated to render
computing direct and indirect costs incurred in assistance in transitioning the data processing
operations management of the outsourcing operations to a new outsourcing vendor, in the event
customer’s data processing facilities located on-site of termination of the outsourcing agreement, at no
(that is, at the business premises of the outsourcing additional costs, and for a defined period after
customer). However, in a remote computing model of termination of the agreement. The agreement must
IT outsourcing, where the vendor uses IT equipment clearly define such post-termination obligations.
of a much larger configuration of which only a portion Further, if a situation arises that the client has
is dedicated to the customer’s services at a given become reliant on a certain proprietary software,
time, it is highly unlikely that the same pricing model operating system or an application software used by
as used in the facilities management model, will work, the vendor in servicing the client, the vendor must
and will, therefore, need a new pricing model such as make suitable provisions to license such software to
a rate card structure. Thus, it can be understood that the new vendor or assist the new vendor in any other
a “one-size-fits-all” approach to pricing models is manner so as to ‘wean off’ the client from such
inappropriate/inadequate and different pricing dependence.

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i ‘What is Outsourcing? IT Outsourcing Types, Models, checklist-what-should-be-included-outsourcing-
Benefits, and Examples’ (Daxx, 12 December 2016) agreement.docx?la=en accessed 20 January 2019
https://www.daxx.com/blog/development-trends/what-is-
outsourcing-benefits-of-outsourcing#2-what-is-it-outsourcing v Samantha Gluck, ‘Benefits v. Risks of Outsourcing IT
accessed 19 January 2019 Services’ (Chron) https://smallbusiness.chron.com/benefits-
vs-risks-outsourcing-services-2504.html accessed 19 January
ii K. Altinkemer, A. Chaturvedi & R. Gulati, ‘Information 2019
Systems and Outsourcing: Issues and Evidence’ (1994) 4(14)
IJIM 252-268 vi Daxx Team, ‘What is Outsourcing? IT Outsourcing Types,
Models, Benefits, and Examples’ (DAXX)
iii Matthew K. O. Lee, ‘IT Outsourcing Contracts: Practical https://www.daxx.com/blog/development-trends/what-is-
Issues for Management’ (IT Dept, City University Hong outsourcing-benefits-of-outsourcing accessed 19 January 2019
Kong)
https://pdfs.semanticscholar.org/3bab/7b64d598f13acb81b229 vii Andrea Brito-Amador, ‘The Top 7 Benefits of Outsourcing
9e4aefa230b4d109.pdf accessed 19 January 2019 Your IT Department’ (Nexustek)
https://www.nexustek.com/blog/the-top-7-benefits-of-
iv ‘What Should be Included in an Outsourcing Agreement’ outsourcing-your-it-department-2/ accessed 19 January 2019
(CPA Australia, 2016)
https://www.cpaaustralia.com.au/~/media/corporate/allfiles/do viii David Hayes, ‘Advanced Issues in Outsourcing
cument/professional-resources/public-practice/outsourcing- Agreements’ (Fenwick &West LLP, 2003)
https://www.fenwick.com/FenwickDocuments/Outsourcing_A
greement.pdf accessed 20 January 2019

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